JPMorgan's Job Cuts Are Great News for the Economy

Voila! Stocks dug themselves out of the hole investors knocked them into during Monday's sell-off, as the S&P 500 (SNPINDEX: ^GSPC  ) closed a hair above last Friday's closing price. The index and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) both gained 1.3% today.

Consistent with those gains, the VIX Index (VOLATILITYINDICES: ^VIX  ) , Wall Street's fear gauge, fell sharply for the second day running, closing below 15 (the VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days).

The silver lining in JPMorgan's job cuts
At yesterday's annual meeting of Dow component
JPMorgan Chase (NYSE: JPM  ) , CEO Jamie Dimon announced this week that the bank would be shedding 17,000 jobs over the next two years, or 7% of its current head count. It goes without saying that this is awful news for those affected, but there is a glass half-full reading of this development for the broader economy.

Indeed, over three-fourths of the redundancies will hit the mortgage business. The reason for that? Part of it is due to the march of technology, but another factor is the decline in the number of mortgage defaults that need to be processed. That phenomenon isn't specific to JPMorgan, either; the Financial Times reported that Bank of America (NYSE: BAC  ) , which is the largest servicer of defaults, is also preparing to cut staff in this area. The improving housing market is having a direct, tangible impact on the financial services industry.

The most recent housing activity data is convincing: Sales of new homes surged last month to the highest level since July 2008. Meanwhile, the Standard & Poor's/ Case-Shiller index showed home prices across 20 major metropolitan regions rose 6.8% in 2012, the largest 12-month gain since July 2006.

Do these developments imply that JPMorgan Chase and B of A shares are buys right now? Trading at 9.1 and 11.3 times estimates of the next 12 months' earnings per share, respectively, neither looks particularly expensive right now. However, the U.S.'s largest mortgage lender, Wells Fargo (NYSE: WFC  ) , looks, to my mind, more attractive than both of them. At 9.6 times the next 12 months' EPS estimate, Wells' shares trade at a slight premium to JPMorgan's, but it isn't saddled with an investment bank that exposes it to whale-sized risks. If you want to add the shares of a large, well-run bank to your portfolio, you may want to consider riding this stagecoach.

Wells Fargo's dedication to solid, conservative banking helped it vastly outperform its peers during the financial meltdown. Today, Wells is the same great bank as ever, but with its stock trading at a premium to the rest of the industry, is there still room to buy or is it time to cash in your gains? To help figure out whether Wells Fargo is a buy today, I invite you to download our premium research report from one of The Motley Fool's top banking analysts. Click here now for instant access to this in-depth take on Wells Fargo.


Read/Post Comments (0) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 2283642, ~/Articles/ArticleHandler.aspx, 4/20/2014 3:52:57 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement